INDUSTRY INSIGHT RETAIL INVENTORY UPDATED FEBRUARY 2020

DEPARTMENT STORES

CURRENT TRENDS PROJECTED VALUES Average mall vacancy rates reached an eight-year high in 2019 (12-MONTH OUTLOOK) according to real estate research firm Reis Department stores finished the 2019 holiday season with a 0.8 percent decline over last year driven by sales decreases for Macy’s, Kohl’s, and JCPenney DECREASING STABLE INCREASING Stage Stores recently announced a long-term strategy to convert its full chain of department stores to Gordmans off-price stores, with a goal of reaching approximately 700 total off-price stores by mid-2020

APPROXIMATE NET RECOVERY ON COST CHANGE IN RETAIL SALES

25%

20%

15% 85-100% 10% high-end 5% 0%

Year over Year Change -5% 80-95% -10% Department Stores Non-store Retailers All Retail Sales mid-tier Source: U.S. Census Bureau

DEPARTMENT STORES - MARKET SHARE (2019)

75-90% 14% 13% mass market 8% 13% 7%

7%

38%

Macy's Nordstrom JCPenney Sears Target Walmart U.S. Other

NOTE: THIS PUBLICATION IS PROVIDED FOR INFORMATIONAL MARKETING PURPOSES ONLY. THE MATERIAL CONTAINED HEREIN SHOULD NOT BE REGARDED AS ADVICE, NOR RELIED UPON TO MAKE FINANCIAL, OPERATIONAL OR OTHER DECISIONS; NOR SHOULD IT BE USED AS A SUBSTITUTE FOR AN ASSET APPRAISAL. ACTUAL RECOVERY VALUES MAY VARY FROM TRANSACTION TO TRANSACTION AND THE RECOVERY VALUES REFERENCED HEREIN ARE FOR REPRESENTATIVE TRANSACTIONS WITHOUT REGARD TO SPECIFIC KEY FACTORS. THIS MATERIAL MAY BE REDISTRIBUTED ONLY IN ITS ENTIRETY, INCLUDING NOTICE OF COPYRIGHT. ALL RIGHTS RESERVED. ©2020 GORDON BROTHERS, LLC. GORDONBROTHERS.COM REFERENCE SOURCES: RETAIL DIVE, U.S. CENSUS BUREAU, STAGE.COM, CORPORATE INSIDER, MONEY. +1.617.426.3233 CNN.COM, ISG-ONE.COM, CREDITNTELL, IBISWORLD THE MOVE TOWARD VALUE: The decline of traditional shopping STORE CONTRACTION CONTINUES: Following a difficult holiday malls and the move to more accessible outlet stores and selling period, Macy’s announced on January 4, 2020, that it would online shopping continues to impact foot traffic for traditional move ahead with a plan to close 125 stores and cut 2,000 corporate department stores. According to Reis and Retail Dive, average mall jobs over the next three years as part of an initiative to go forward vacancy rates recently hit their highest level in eight years and as a smaller, more robust company. This continues a trend for the store closings totaled over 9,300 for 2019, an increase of more than iconic retailer, having closed over 100 stores across the country 60 percent over 2018. Pressure on traditional department stores to since 2015 as part of rightsizing efforts. Macy’s noted that it plans compete on price with mass merchants like Walmart and Target, to close stores in its weaker shopping malls in order to focus on off-price retailers like T.J. Maxx and Marshalls, and mid-tier chains opening smaller-format stores in strip centers. like Kohl’s has resulted in gross margin compression, exacerbated As department stores continue to face heavy competition from by an increase in year-round discounting. Based on reporting from superstores, discounters, Internet, and specialty retailers, several Retail Dive, widespread discounting could make 2019 the most chains closed underperforming stores in 2019. Sears topped the promotional holiday season since the recession. list with 175 store closures, JCPenney with 27, and Kohl’s with four. After a dispointing holiday season, Kohl’s announced on The best performing category for December 2019 was clothing, February 12, 2020 that it would lay off 250 staff members as part which increased 1.6 percent over November and likely benefited of a restructuring effort. As part of the job cuts, Kohl’s plans to let from targeted promotional activity based on reporting from go of a segment of its regional store leadership team and will be Creditntell. Several specialty retailers, including Anthropologie restructuring its merchant organization. (+5.0 percent) and Free People (+8.0 percent) posted positive holiday season sales. However, some traditional department stores Some upscale department stores also faced struggles in 2019, did not perform as well, including Macy’s, which was down 0.6 including Henri Bendel, Barneys New York, and Nordstrom. Henri percent over last year. JCPenney struggled through the season Bendel closed all of its 23 locations in 2019 including its Fifth with comparable store sales decreasing 7.5 percent, on top of a 3.5 Avenue flagship in New York City because of declining sales. percent decline for holiday 2018. Barneys, which filed for bankruptcy in August 2019 has closed the majority of its stores after Authentic Brands Group won court For November and December, Creditntell noted “much of the approval to purchase the company. Authentic Brands announced top-line growth across discretionary sectors, including home plans to open Barneys shops in about 40 Saks Fifth Avenue furnishings, apparel, and department stores is expected to locations in 2020. Saks also offers merchandise under its “Barneys pressure fourth quarter margins, given the rampant promotions at Saks” banner on its website. Nordstrom also closed three through the holiday season, as well as the impact of tariffs and underperforming stores in Rhode Island, Florida, and Virginia in freight costs.” 2019. The department stores industry is expected to continue contracting Value-focused retailers performed better, with Target and Stage through 2024 (-1.8 percent), albeit at a slower rate than it did for Stores both coming in at +1.4 percent for the holiday period. Going the prior five-year period ending 2019 (-4.0 percent). According head to head with department stores, Target generated positive to research firm IBISWorld, growing competition from online holiday comps in two key categories: apparel (+5.0 percent) and retailers is expected to increase pricing and gross margin pressure beauty (+7.0 percent). on traditional department stores. To compete these retailers will need to offer services that will set them apart, such as excellent Building on a strategy that began in 2018, Stage Stores recently customer service, extended warranties, expert product knowledge, announced a long-term strategy to convert its full chain of or innovative shopping opportunities. Retailers can also target department stores to Gordmans off-price stores with a goal of luxury consumers or expand their outlet or off-price concepts. reaching approximately 700 total off-price stores by mid-2020. With lingering economic uncertainty going into 2020 and Chinese tariffs As the sector continues to contract, lenders with department still in effect for hundreds of consumer goods, customers will stores in their portfolios, particularly those that are mall-based, likely continue to let value and convenience drive their spending should continue to conduct regular appraisals in order to decisions. understand changes to net recovery values as they occur.

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Bringing over 15 years of experience in the disposition and valuation of retail and consumer products, Becky Goldfarb oversees all aspects of retail asset valuations. Prior to that, Becky was responsible for the financial analysis of retail dispositions across all industry sectors. Read her full bio here GORDONBROTHERS.COM +1.617.426.3233